7. CONCLUSIONS AND RECOMMENDATIONS

As the Administration and Congress shape U.S. policy on climate
protection in the coming months, they will face persistent pressure to postpone
action. Where calls for delay are more than an attempt to simply derail climate
policies, they will be motivated by the belief that delaying now and
implementing policies later will lower the costs without affecting our ability
to meet long-term climate objectives.

This notion, however, ignores key aspects of economic, political
and climate systems:

· From an economic perspective, early action is
needed to initiate appropriate changes in the capital stock and to hasten
technological advances. Climate protection policies may also be consistent with
certain economic benefits.

· Politically, action sooner rather than later will help to
establish a credible commitment to climate protection that will be necessary to
ensure domestic change. Leading by example will also create a much stronger
basis for ensuring international cooperation.

· Early action seems prudent given the uncertainties
regarding safe stabilization levels and the risks from faster rates of
concentration build-up.

As a consequence, Congress and the Administration should consider
steps that will begin immediately to influence capital investment and that will
spur more rapid development of alternative energy technologies. An initial role
for the Administration is to ensure that a meaningful treaty is reached in Kyoto
- one that incorporates sufficiently stringent targets in the near-term to
create an imperative for domestic policy implementation. Ratification by the
Senate and the passing of enabling legislation should occur quickly to reaffirm
commitment and to make full use of the time available. Above all, the mistake
made after Rio must be avoided, where failure to implement firm policies from
the outset has forced the United States to concede early on that it would fail
to meet the targets.

A central plank of any emissions reduction strategy must be the
use of economic incentives. Evidence since Rio has shown that small-scale
voluntary programs alone are unable to fundamentally change investment and
consumption patterns. Broad mandatory policies will be required to alter
behavior throughout the economy. A balance needs to be struck between a policy
that is sufficiently early and firm to signal commitment, yet sensitive to the
slow processes of capital turnover and technological development. A carbon tax
implemented soon and at a low level yet which rises gradually is one policy that
meets these criteria. Though taxes remain politically unpopular, if they are
levied as part of a tax shift rather than a tax increase, the overall tax burden
would remain unchanged. The same incentive structure could be achieved with a
tradable permit system. Ideally, this should be based on short budgetary
periods, say of a year or two, so as to remove the temptation to delay action
and thereby increase the risk of failure to comply.

As firms and consumers perceive policies as permanent, the
changing direction of capital investment and technology should make it possible
to avoid high tax levels or permit prices. Experience shows that the costs of
environmental compliance have tended to fall, not rise, once actual measures
have been implemented.

A balance needs to be struck between a policy that is
sufficiently early and firm to signal commitment, yet sensitive to the slow
processes of capital turnover and technological
development.

A market instrument should be supported by a series of other
policies that will not only provide direct benefits but will help to convey
commitment to climate protection. In particular, inducing appropriate
technological change is key. Incentives need to be set up to encourage greater
private R&D in renewable energy sources and in energy conservation. There is
also a need for greater R&D on the government's behalf, particularly
for invention and innovation. In addition, the existing pattern of subsidies and
tax expenditures to conventional energy sectors should be reassessed and
changed. Most important, short-term policies must be recognized as merely the
first step of a long-term economic transition that will be necessary under any
path to achieve stabilization of greenhouse gas concentrations.

The Administration and Congress must be aware of the message that
inaction would send to the economy. Failure to reach or ratify a treaty would
add another precedent for non-action to the failure of the Rio commitments.
Industries would begin to expect the same again if they could demonstrate that
the same adjustment costs are relevant. Further investment would likely be
channeled into carbon-intensive capital and technological development of
carbon-intensive energy systems, which would increase dependency on fossil fuels
and make adjustment costs higher and even more relevant in the future.

By, in effect, delaying since 1992, we have already lost
precious opportunities to make emissions reductions.

By, in effect, delaying since 1992, we have already lost precious
opportunities. Meeting any emissions target now is already more expensive than
it would have been if credible market and policy signals had been put in place
five years ago. Continued postponement of policy implementation only risks
making future changes of direction both more abrupt and more
costly.